Holder of the note
will receive interest payment in addition to the face amount of the
note.

Noninterest bearing
note

Holder of the note
will receive the face amount only on due date.

Imputation of
interest revenue

If the note does
not pay interest or interest rate is lower than usual, holder of the
note should recognize imputed interest revenue.
An example
On July 1, 20X1, Entity A loaned $200,000 cash and received a
promissory note with the face amount of $210,000 due on June 30, 20X2.
In this case, $10,000 (= $210,000 - $200,000) is recognized as
interest revenue.
Journal entriesJuly 1, 20X1

Debit

Credit

Notes
receivable

210,000

Cash

200,000

Unearned interest revenue

10,000

December 31, 20X1

Debit

Credit

Unearned
interest revenue

5,000

Interest revenue

5,000

Interest revenue
for 6 months = $10,000 x 6/12 = $5,000June 30, 20X2

Debit

Credit

Cash

210,000

Notes receivable

210,000

Debit

Credit

Unearned
interest revenue

5,000

Interest revenue

5,000

Notes receivable
discounted

If the holder of
the note needs to get cash now, instead of waiting for the due date of
the note, the note can be sold to other party at a discounted price.
An example
On October 1, 20X1, Entity A sold the products and received a
promissory note with $200,000 face amount, due on June 30, 20X2.
Interest will be paid on due date at 2% annual rate.
Journal entriesOctober 1, 20X1

Debit

Credit

Notes
receivable

200,000

Sales

200,000

December 31, 20X1

Debit

Credit

Interest
receivable

1,000

Interest revenue

1,000

Interest revenue
for 3 months = $200,000 x 2% x 3/12 = $1,000

On January 1, 20X2, Entity A sold the note receivable at the price of
$198,000.January 1, 20X2

Debit

Credit

Cash

198,000

Loss on sale
of notes receivable

3,000

Notes receivable

200,000

Interest receivable

1,000

Discount rate

An example
On March 1, 20X1, Entity A received products and received a promissory
note, with $300,000 face amount due on September 30, 20X1. The note is
an interest bearing note with 4% interest payable on due date.Journal entriesMarch 1, 20X1